Fidelity's Bolton Backs China's Consumers

ANTHONY BOLTON IS MAKING a bold bet on China's 1.3 billion consumers. Over the next five years or so, the top-performing Fidelity portfolio manager expects a dramatic change in the structure of the world's largest emerging economy: Domestic consumption will outpace exports and infrastructure investment as the country's growth engine.

That's why the British emerging-market investor's new closed-end fund, the Fidelity China Special Situations Fund (FCSS.L), which launched April 19 on the London Stock Exchange (where U.S. investors can invest through a broker), has about 40% of its holdings in Chinese consumer-discretionary, consumer-staple, and telecom-services stocks. About 30% is in financials, with the rest mostly spread among information technology, health care, industrials and materials.

"China is at a sweet spot in emerging markets where significant amounts of people can for the first time afford cars, apartments and other goods," the white-haired 60-year-old Bolton said in an interview with Barron's in Shanghai in late July.

Andy Rothman, a strategist at CLSA Asia-Pacific Markets in Shanghai, concurs. This year, Rothman predicts, higher wages and low household debt will enable domestic consumption to drive almost half of gross-domestic-product growth, which he estimates at 9% to 10%, while investment in infrastructure will play second fiddle for a change—and exports will contribute zero to growth as demand wanes in the U.S. and Europe.

Bolton's portfolio shows a particular liking for telecom and Internet plays—three are among the fund's 10 largest holdings. "The driver of China's growth is changing to domestic consumption, and telecoms fit into that," says Bolton. He points out these companies have no competition to speak of, and the use of handheld-Internet devices has caught on so much that China now has 25.2 million users of third-generation (3G) wireless-mobile technology. Another enticement, adds this die-hard value investor: "What I like about telecom is that it's one of the most unpopular sectors in the world."

The Peak: Hong Kong surged as earnings rose and Beijing's tightening seemed to be over.

Among the best performing stocks in the young portfolio, Bolton says, is China Unicom (0762.Hong Kong). The nationwide operator of fixed lines, mobile phones and broadband Internet services is up 15.64% since the fund launched April 19, closing at 10.50 Hong Kong dollars (US$1.35) on July 26. Unicom has been expanding fast, adding 14.2 million mobile-phone subscribers in 2009 alone and unveiling a 3G mobile-Internet service last October. Earnings per share are expected to fall 30% to 0.28 renminbi (US$0.04) this year as margins narrow on a 7% rise in revenue before rising by 64% next year.

Although the fund's No. 1 stake, China Mobile (0941.Hong Kong) hasn't done much since the fund's launch, it's a keeper, says Bolton. The company has 544 million mobile and 3G subscribers plus a 41% share of the 3G market. Earnings per share are expected to increase by 2.26% this year to 5.87 renminbi on a 6.5% gain in revenue.

Tencent Holdings (0700.Hong Kong) has fallen more than 10% in recent months. But the company, which provides online games, instant messaging and other Internet-based services, is core to Bolton's consumer-oriented strategy. For the quarter ended March 31, Tencent's revenues increased 68.70% from a year earlier, to 4.23 billion renminbi (US$619.1 million). Profit attributable to equity holders in that time was 1.78 billion renminbi. For the past 12 months, the stock is up 33.62%.

It's too early to tell, but the prices that fundholders are paying for this closed-end fund suggest Bolton's bet on China's consumers is already paying off. In U.S. dollar terms, the market price of the fund was up 4.47% from April 19 to July 27, according to Lipper. In British pounds, it was up 2.27%. The fund had 519.9 million pounds (US$813 million) in assets under management as of July 27, according to Morningstar. During the same period, the MSCI China Index of large and mid-cap stocks was down 1.57% in U.S. dollar terms.

The fund's debut marked a return to the trenches for Bolton, who had hung up his hat as portfolio manager of the Fidelity Special Situations Trust, a closed-end fund specializing in large-cap value, in 2007 after 27 years of chalking up 19.5% annualized growth. He took a lower-stress post mentoring Fidelity analysts in London for three years. Then he moved to Hong Kong, where he reorganized a Fidelity team that was already managing about US$20 billion in assets to run his new China fund.

Looking ahead, Bolton sees his main challenge as managing the volatility of China's stock market, which is prone to sudden undulations. So he is investing in mainland China companies listed in Hong Kong, Singapore and elsewhere instead of their Shanghai-listed, or A-, shares. Shanghai-listed companies tend to invest in each others' stock, which can drag their own A-shares down when bad news pulls down the broad Shanghai market.

Bolton has set a formidable goal of performing in the top quartile over three-year periods. "You will have more volatility against the benchmark over time, but I think I have proved that I can deliver higher average returns over the long term," he says. "I am using the same approach in China."

MICHAEL SHARI is a freelance journalist in New York, where he covers finance, politics and emerging markets.

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